Mark Jenner & Co – Forensic Accounting Services

The incidence of mortgage fraud appears to be increasing. Much of it has been coming to light as a result of the down turn in the property market that accompanied the current general economic down turn or “credit crunch”. When property values reduce to below the level of the mortgage that has been advanced on it the lenders begin to sit up and take note.

One of the pivotal areas within the whole property business is the conveyance process. This is where two firms of solicitors will represent the seller and the buyer respectively and ensure that money is transferred properly in return for the title to the property.

Most people look to pay as little as possible for the speediest conveyance possible. 99 times out of a 100 this probably works well enough. However, property law is complex and when things go wrong they are usually the unusual issues that many swift sale transactions would overlook. This is why for larger more expensive properties, even though the process is essentially the same, the conveyance fee is higher because of the higher risk of losing more money.

The buyer’s solicitor will take receipt of mortgage funds and documents that the sale process relies upon, such as valuations and certificates of building regulation compliance. The solicitor manages the whole process and is uniquely positioned to be able to vet the process for fraud. Indeed, all solicitors have an obligation to “know your client” for the purposes of anti money laundering regulations 2007 and to report any suspicious financial activity they come across.

A typical mortgage fraud will involve a property company either selling in its own right or acting as agents for property holding companies. They will inflate the property prices based upon the rental incomes that they say can be obtained from the properties. There is no law to stop them doing this. If a glossy brochure says that a three bedroom student flat costs £250,000 and allege that each room can earn £90 per week – then this indicates a return on investment of 5.6%. This would be an acceptable return in the property business (there is no standard as it varies from region to region, property to property). However, it does rely on the landlord letting all three rooms out for 52 weeks of the year and achieving the required £90 rent.

If the property was sold as bricks and mortar at an auction it might sell for £150,000. However, the valuation provided by the surveyor to the mortgage company will be based on the rental income and possibly on similar properties that the same development company has been selling nearby. When property prices were increasing this practice can be overlooked. When prices are plumetting and people try to realise their assets the overvaluation is discovered.

The conveyance process should spot this practice. The valuation used for the mortgage, arranged by the property company, should not be relied upon and any solicitor worth his or her salt will say that an independant valuation should be carried out. Any savvy potential investor will want to get a feel for property values in the area that they are buying anyway.

Where a problem arises is when the property sales take place in London with a lot of glossy marketing hype and the properties being sold are, for example, in the North of England. During the early 2000s there was a surprising amount of spare capital and credit available (as everybody has now come to realise) and individuals were mopping up buy to lets on 100% mortgages without even visiting them first. It is hard to believe but everybody was riding the wave of success and were blind to the possibility of a property crash.

In some cases solicitors were being appointed by the property developers on behalf of the buyers. They were happy to take the business, 100s of transactions a year at £600 per time. The trouble is that they were not looking for overvaluations, turning a blind eye to the gifted deposits (thus facilitating 100% mortgages). In short, a few conveyance firms were a party to the mortgage fraud. Developers, solicitors and surveyors conspired in what was much more than sharp business practice to ensure that by the time that the property values crashed in about 2007/08, many buyers lost their investments and went deeply into negative equity. The mortgage companies that were involved in the property company that I investigated lost on average £63,000 on each and every property where they advanced loans (there were several 100s of properties in this one case) thus they felt the impact of a very large multi million £ mortgage fraud!

Firms were shutting down in 2009 ahead of their October PII renewal (the Law Gazette)

Many conveyance firms have felt the pinch as a result of the greed of a few. All firms must have professional indemnity insurance in place that covers them for fraud amongst other things. Such is the increased incidence in mortgage fraud that these firms have faced severe hikes in their PII cover. For example one firm reported an increase of 550% to £110,000, some 25% of turnover! Some firms have been shutting their doors to conveying business and some have even gone into administration to avoid paying the bill when due.

The Labour government has been criticised widely for the huge raft of legislation it has introduced in its 12 or so years of reign. Much of it has been lengthy and often arguably unnecessary. The burden of regulation on any business trying to struggle through the current down turn has increased and is significant.

However, there must be credit in the attempts being made to improve the anti-fraud and white collar crime framework within the UK. The Proceeds of Crime Act 2002 introduced what some say are draconian powers of confiscation for the authorities to use. Draconian they may be but that is fair enough when they are used against the ones they were designed for – the organised criminals with the obvious trappings of unearned income. There can be some criticism when the letter of the law is used to attempt to obtain large sums from petty criminals with default sentences when they can’t be paid.

One bit of legislation that makes you wonder who is actually writing these laws is the Fraud Act 2006. I know that many of the regulatory authorities that I work with are a bit dubious about this Act. Those police officers and prosecuting lawyers tell me that they were happy with the Theft Acts and the Common Law offence of conspiracy to defraud. The Fraud Act was meant to codify these and other areas - and it may be that using it will require a few more years of testing through the courts.

I did note in the Fraud Act that some Companies Act style amendments were contained within it, whereby the prohibition on directors loans, quasi loans, credit transactions and related transactions had been abolished and replaced by a requirement for shareholder approval. Breaches are no longer criminal offences and the de minimis level for needing shareholder approval has increased from £5,000 to £10,000.

My first impression is that this will lead to a huge increase of petty frauds in the £5 to £10,000 range.

New legislation, Fraud Reporting Centres and Strategic Fraud Authorities are fine and to be admired. However, it is no substitute for investment at the sharp end. We need stronger regional police economic crime units who all have access to fraud investigation and experienced forensic accounting resources. This is really where a public and private sector liaison would work, and was one of the ideas behind the various regional fraud fora that have been established around the UK.

If a person is defrauded he or she must present a clear cut case to the authorities. It is no good shouting “fraud” – it needs investigating and presenting clearly. Of course this is a hurdle that many victims fall at and the fraudster escapes to ply his trade again somewhere else. Those that do investigate, even employ their own forensic accountants to build a financial case to present to the authorities, can be equally at a disadvantage if they get the investigation wrong.

Say for instance a company decides to investigate a £9,000 director loan that is thought to be defalcation by the director. The director is not committing a crime under the Fraud Act - the matter will likely be civil. Therefore the police will not be interested and it will be hard to recover such unauthorised borrowing. There are still difficulties with more substantial “borrowings”. Say £50,000 is missing and this time it is fraud. The culprit is not presenting a defence of taking the money as a loan – he is simply denying the matter.

Any accusations made during an investigation will not help, the director may simply leave citing constructive dismissal and the business may end up paying out as much and more than it had already lost in compensation awarded by an employment tribunal.

The point is that if the police are to enlist the help of the private sector in the fight against fraud, funded by the victims, then they should have sufficient resources employed to monitor and assist with the private sector enquiries. This will enable them to be carried out properly and in a way that will result in a successful prosecution for the authorities, civil asset recovery for the victims and/or justified and successful confiscation proceedings that will help to fund both the authorities and the out of pocket victim.

A newsletter for fraud practitioners

The New Year has got off to a flying start with a number of new cases waiting for me on my return from what must have been the coldest holiday on record – I spent the first few days of 2010 in New York!  Suffice to say it was not much warmer on my return and unfortunately my current work load does not include the prospect of a visit to Dubai or the Cayman Islands.

However things are warming up in the expert witness side of my work with a number of trial dates in the diary between now and Easter.  It does seem that contrary to recent thought that experts are seldom called to give evidence in fraud trials the reverse now seems normal.  The reason always given for steering the expert away from the witness box was because of the complex nature of the crime and therefore perhaps the potential for tying the judge, jury and even the expert himself, in knots!

Accountants in the firing line – who said we were boring?

Lawyers, police and even teachers get their own TV soap dramas but accountants never seem to feature – that is other than the occasional cameo appearance and the subject of yet another boring accountant joke!  However, we number crunchers can get into some scrapes, as recent news headlines will confirm.  There is the case of the ex-KPMG trainee who made £25,000 false expense claims from his employers to fund an online gambling habit.  His punishment was a severe reprimand from the ICAEW and a 12 month exclusion from this professional body.  Seems fairly mild when compared to another accountant who is currently facing charges of money laundering and conspiracy to defraud £millions via a Ponzi scheme. He was the crooks accountant and apparently failed to spot the suspicious activity of his clients.  He could face four years or more in jail for making a few pounds in what he thought were legitimate professional fees.

Vantis, the UK listed national accountancy firm are in serious cash flow difficulties (according to their auditors Ernst & Young) which appears to be as a result of involvement with the liquidation of assets relating to the multibillion dollar fraud masterminded by the American financier Allen Stanford. The US authorities have frozen the assets which means that Vantis is unable to be paid for its services.

I can’t believe that a capable scriptwriter could not come up with something to rival “The Bill” with all these frauds going on!

The Government is as much use as a chocolate fireguard…

When it comes to scaling up the fight on fraud the response by the Government is unlikely to make much impact. £29 million was earmarked as a budget in 2008 for developing a cohesive UK approach to the problem of fraud.  So far we see the advent of the National Fraud Strategic Authority (NFSA) which, true to form for a publicly funded organisation, has already its first name change to the National Fraud Authority (NFA).  But more to the point, what is it doing to bring together the police fraud squads, private sector fraud resources and other fraud regulators to become an effective front against the perceived easy pickings that fraud seems to be? At least the Attorney General’s office has updated its links from “NFSA” (which had stopped working) to “NFA” on its web site now and we can all see the program of work they are embarking upon. Or can we?

The stated purpose is to “…draw together the counter-fraud community…” This implies public sector fraud prevention bodies and does not mean more trained police fraud squad operatives with access to investigation resources.  Reading further the NFA website suddenly admits that “…we are not solely responsible for putting the NFS (National Fraud Strategy) into practice…” I worry that we have another government quango spending our money and very little will get done.  I suppose time will tell.

All fraud news is bad news?

It seems that we always complain about the fraud framework, whether it be fraud prevention by the authorities, prosecution, or defending white collar business crime. It is the nature of the business…it is a big problem.

Fraud causes so much trouble and strife for millions of people that it is no wonder that the few real anti-fraud regulatory forces we do have guarding us become a little over-zealous in trying to put the culprits behind bars.  This in itself creates a real need for a robust criminal defence industry in order to balance the adversarial system that results.  If the police generally do not use forensic accountants to present their frauds, the defence certainly needs them to temper the allegations in many cases.  The general consensus is that the Legal Services Commission’s proposals to shave 20% from the expert witness budget available to the defence teams is going to result in fewer capable experts being available in the future.  Access to justice may well be denied for some – one thing is for sure, LSC will no longer be funding expensive city centre offices – which may not be a bad thing?

Balancing quality with profits has always been difficult for us professionals, who have relied upon a wave of business expansion to be able to carve an acceptable slice of remuneration for themselves.  Now that we are trundling along the bottom of a downturn, regardless of the miniscule percent of recovery alleged for the recent quarter – there is even more need for investment in the fraud sector.  Then we might see a little less talk of co-ordination of fraud resources and a lot more actual investigation, prosecution and prevention of fraud.

By Mark Jenner – Mark has been a forensic accountant for over 15 years specialising in fraud for most of that time. He heads up a dedicated fraud advisory service line focusing on expert witness assignments and fraud investigation. Regularly attending court to give oral evidence, his portfolio includes criminal fraud prosecutions, proceeds of crime and money laundering offences, corporate enquiries (including insolvency investigations) and asset tracing assignments.

Use of an expert witness in civil litigation

A long raging argument over proportionality of expert witness costs has resulted in a fundamental review of the rules and procedures governing the costs of civil litigation. Lord Justice Jackson was appointed by the Master of Rolls in 2008 to carry out this review culminating in his 555 page report on 14 January 2010. This contained just two proposals of interest to expert witnesses

One change proposed is to alter Civil Procedure Rule 35 so that any party wanting to bring an expert witness to the matter should provide to the court an estimate of the cost of doing so.

The second change is a proposal to introduce the Australian practice of concurrent expert evidence known Down Under as “hot tubbing”

With hot tubbing, two expert accounting witnesses for example would be sworn in at the same time and would attend a discussion chaired by the Judge. The agenda would be fixed by a joint statement from the two experts from an earlier meeting of experts held under CPR 35.12 which would record the matters upon which the experts still disagreed. The discussion could be attended by counsel from either party who can ask questions as would the Judge who would steer the meeting.

Another system of expert evidence management is being currently proposed by the Law Commission whereby the evidence is tested pre-trial in order not to waste the time of a full court.

The hot tubbing should allow the evidence to be explored in advance of any full blown hearing but its success will be down to the skills of the Judge – running the risk that the latter may well secretly favour one party or another. However, it is unlikely that the hot tubbing will save any money! By the time the experts are ready to come to the discussion “in the tub” they will have expended all their time and effort in preparing their reports. Although there may be many ways in which expert evidence can be better used to reduce the cost of litigation, the Jackson report does not address them.

Ways to reduce the costs of litigation (relevant to expert accounting witnesses)

These methods are applicable to an expert witness or a forensic accountant operating under civil procedure rules as well as criminal procedure rules and relate to private funded experts and those paid by the Legal Services Commission:

• All reports written under civil or criminal procedure rules are done so as if they were to be placed before the court – irrespective of whether this happens or not. Costs would be saved by the introduction of advisory statements that could assist understanding.
• Staged instructions would allow for just the required amount of input to be obtained from the experts up and until a matter perhaps settles, without the need for a full report and a court hearing.
• If experts were involved earlier there is much opportunity for saving, as opposed to expensive and rushed last minute instructions. Expert work can avoid unnecessary avenues of investigation.
• Wasted court dates are expensive and could be avoided by proper court funding and management.
• By choosing the “cheapest” forensic accountant (a favorite ploy of the Legal Services Commission) very rarely is best value obtained.
• Expert instructions are often vague leaving the expert to decide what should be done. Sometimes this can produce valuable input into a case but more often leads to inefficient and uninformed work.
• Late payments of experts has been considered as one of the major forces inflating experts’ fees – it is not helpful and leads to an aggressive stance on occasion by the expert witness. It is not acceptable for public funders in particular (LSC) to withhold funds to ensure their budget spending patterns are maintained.